Woodland News and Notes

Appeals Court rules taxes
on MFL withdrawal
go to current municipality

By Nate DeBaun
    The Court of Appeals (District III) released an opinion in March 2011  regarding payment of back taxes when a parcel of land is withdrawn from Wisconsin’s Managed Forest Law (MFL) Program. The MFL Program allows a landowner to pay reduced property taxes on a parcel of land in exchange for maintaining the land for forest products, and for following other guidelines set forth by statute and by the Wisconsin Department of Natural Resources. 
    Upon application to the DNR, an MFL order will be issued, setting the requirements and conditions of participation. One significant aspect of the MFL program is that a landowner agrees to maintain the forested land within the program for either 25 or 50 years. Failure to abide by the order, or early withdrawal from the MFL program, results in taxes and penalties against the landowner. These include back taxes consisting of what the full tax rate on the land would have been if not for the reduced rates under the MFL program. The back taxes apply all the way back to the beginning of the term, when the land was first enrolled in the MFL Program. 
    Town of Somerset vs. Wisconsin Department of Natural Resources, 2010 AP 1501 (March 29, 2011), involved a piece of property in which a landowner had entered the MFL program in 1987. At the time that the property was enrolled, and through 2007, the property was located in the Town of Somerset, in St. Croix County. In 2007, the Village of Somerset annexed the land, and purchased it from the landowner.
     The Village withdrew the property from the MFL program in 2008, before expiration of the MFL term, and therefore owed back taxes and penalties for the early withdrawal. The Village of Somerset paid a withdrawal tax of $43,597.28 to the DNR. By statute, once the DNR collects a withdrawal tax, the tax is returned to the municipality where the land is located. In this case, the DNR returned the withdrawal tax back to the Village of Somerset, since the land is currently located within that municipality.
    The Town of Somerset filed for judicial review of the DNR’s decision to return the withdrawal tax to the Village, and argued that the DNR should have prorated the withdrawal tax between the two municipalities based upon the number of years that the property owner enjoyed the reduced tax rate in each of the municipalities. Based upon the Town’s calculations, under such a proration, the Town would have received approximately 91% of the withdrawal tax, with the remainder going to the Village. 
    The Court of Appeals upheld the lower court’s determination that the DNR acted properly in returning the withdrawal tax only to the Village, with no compensation to the Town. The Court held that the MFL statute clearly indicates that the withdrawal tax is to be paid to the municipality where the land “is located” at the present time. 
    While the statute contains a carveout allowing for return of withdrawal tax to separate municipalities where the land is located in more than one municipality, there is no carveout to apply the withdrawal tax to any other municipality where the property may have been located at some other time during the MFL term. Therefore, regardless of whether land subject to the MFL was always within the same municipality, the withdrawal tax will go to the current municipality only.
    The result in this case may seem unfair to the Town of Somerset, particularly given that it was the Town that dealt with the reduced tax base during the majority of the term that the property was within the MFL program.  However, with the statute clearly indicating that the withdrawal tax is paid to the municipality where the land is located, there is not much room for argument in favor of the Town, absent either a change or clarification of the statute by the Wisconsin Legislature, or a differing view by the Supreme Court, should the Town pursue an appeal. 
    The situation in this case was somewhat unique, in that it involved rural, forest-covered land that changed municipalities during its MFL term. One can also argue that the Village of Somerset only withdrew the land when it did, knowing that it would receive back its own payment of the withdrawal tax.  Otherwise, the Village might have simply allowed the land to remain within the MFL Program for the last few years of its MFL term. 
     If the Village had kept the land within the MFL program through the end of the term, there would have been no withdrawal tax applied, and the Town of Somerset’s position with respect to the land (and property tax payments in connection with the land) would not have changed.
     It is not as if the previous property owner skirted the MFL rules and regulations during the time that the property was within the Town’s domain. The land was, as far as can be discerned from the record, managed in accordance with MFL requirements throughout the term, up through the time of withdrawal by the Village.
    The Somerset case underscores a point that was not relevant to the court’s examination, but is an important consideration for anyone interested in owning, purchasing, or selling land that is subject to an MFL Order -– the result for the original and subsequent landowners. 
When land is subject to an MFL order, there are a number of important considerations for anyone desiring to buy or sell all or part of a property that is subject to the order, including: the term of the order;  when within the term the land is being purchased or transferred; and potential penalties and back taxes. 
    An existing MFL order is transferrable to a new owner provided that after the transfer, the land continues to meet certain requirements. The withdrawal fee would come into play only if the subsequent owner desired some other use for the land that is not allowed under the MFL program, or simply did not want the land to be subject to the requirements of the program.
     In most instances, a subsequent purchaser of land within the MFL program would be likely to keep the land within the program in order to avoid the withdrawal fee. 
     Where a prospective purchaser does not want to continue to manage land under the MFL program, they will purchase a property knowing that a withdrawal fee and penalties will be owed as soon as the land is withdrawn. Presence of an MFL order may be a reason to attempt to negotiate a reduced purchase price from the seller, given the restrictions imposed by the MFL program.  However, if the purchaser is interested in the benefits of MFL certification, there would be no reason for any reduction in price.